Angang Steel Co., the listed unit of China’s fourth-biggest steelmaker, jumped the most in two months after media reported that its parent will be merged with a local industry peer.
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In a statement on Tuesday offering the first details of the long-anticipated deal, Wuhan said Baosteel will issue new shares to its shareholders to absorb the company.
The two firms are the world’s fifth and 11th largest respectively by production capacity.
The new firm will be called China Baowu Iron and Steel Group, the report said, adding that the state asset watchdog has already approved the plan and submitted it to the State Council – China’s cabinet – for final approval. The combination of assets will give the new company an estimated 60 million tons of capacity, placing it as second largest producer behind ArcelorMittal.
The restructuring of China’s steel mills is part of a government initiative to curb overcapacity.
Shanghai-based Baosteel’s net profit plummeted 83 percent to 1 billion yuan past year, while Wuhan Steel lost 7.5 billion yuan, compared with a 1.3 billion yuan net profit in 2014.
“This is part of the government’s efforts to push through supply-side reform and will have a model effect for the new round of mergers and acquisitions”, said Hu Yanping, an analyst with industry website Custeel.com.
“Restructuring in China’s steel industry is the trend and it’s an unstoppable one”, said Chen Bingkun, an analyst at Minmetals and Jingyi Futures (五礦經易期貨).
Restructuring of another two Chinese steel giants both based in northeastern province of Liaoning – Ansteel and Benxi Steel Group – is next on the agenda, Shanghai Securities News reported Tuesday. According to Chi Jingdong, Deputy Director of the China Iron and Steel Association, the government wants to consolidate 60-70 percent of the nation’s steel mills into 10 mega mills.
Shares in Angang Steel Co. and Bengang Steel Plates in Shenzhen were both suspended before trading on Tuesday pending a statement, they said separately.
Beijing has vowed to eliminate 100 to 150 million tonnes of capacity – out of a total of 1.2 billion tonnes – by 2020.
The mergers will create a monopoly in the China steel market which theoretically should allow the steel giants to control production.
Chinese steel demand slumped as the global industry has been battling overcapacity.
However, another analyst did not see China having an edge over global competitors like ArcelorMittal and US Steel. “I don’t think these mergers will be able to change the current market status of the world’s steel industry”, he told news agency AFP, adding that high-end markets would still be dominated by foreign companies. China has been accused of price dumping – selling its steel cheaply overseas in order to clear its stocks.
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China’s steel overproduction has hit global steelmakers and has made a huge dent in sales forcing them to close several steel plants across Europe and North America.
